Name That Trade: $CSCO’s CEO Gots To Go

by Dan December 18, 2014 2:09 pm • Commentary

Last night Oracle (ORCL) reported fiscal Q2 results that were broadly better than expected, with forward guidance that was encouraging and much bullish commentary on the call.  The stock is up 8.5%, making new 52 week highs and just a few % from its internet bubble highs in 2000.  Heading into the print, the stock had been an under-performer to many of its large cap tech peers on a ytd basis, and a valuation below a market multiple:

ORCL 15 yr chart from Bloomberg
ORCL 15 yr chart from Bloomberg

Today’s gap in ORCL is the largest one day gain in the stock since September 2010, but interestingly comes in the first quarter reported since long time CEO Larry Ellison stepped down from that role and his new Co-Ceos are now manning the ship.

Another example of this sort of breakout price action after a changing of the guard would be Microsoft (MSFT).  This stock was a darling in the late 1990s internet bubble, which until this past year had also been a chronic under-performer.  It wasn’t until a legacy CEO was pushed out last year, after years of bad execution and missed opportunities, that the stock started to work back towards the bubble highs:

MSFT 15yr chart from Bloomberg
MSFT 15yr chart from Bloomberg

Intel (INTC) is another internet bubble leader that started to breakout of a long malaise when they also changed CEOs last spring:

INTC 15 yr chart from Bloomberg
INTC 15 yr chart from Bloomberg

And then there is Cisco Systems (CSCO).  The stock, like ORCL trades well below a market multiple, and below INTC and MSFT.  Unlike all three, the CEO who presided over the company during the web bubble is still at the helm, and to be honest, seems wildly out of touch with what tech investors are looking for in this day and age.  While the stock is up 22% in 2014, it is only up 100% off of the 2009 lows, vs the S&P500 which is up 200%. The stock remains 70% below its 2000 bubble levels:

CSCO 15yr chart from Bloomberg
CSCO 15yr chart from Bloomberg

There are no if ands or buts about it, the quickest way to get investors interested again in CSCO would be for CEO John Chambers to step down and replace himself with someone who can articulate the CSCO turnaround differently from the almost 10 restructurings that Chambers has presided over in the last 15 years.

CSCO trades at almost 13x current year’s expected earnings that are supposed to grow only 3% on 3% sales growth. The company pays a dividend that yields 2.8%, a monster buyback fueled by a massive cash balance of $52 billion ($31 billion net of debt), equal to 37% of their market cap.  If there was ever company that needed to simplify their offerings, get rid of some legacy businesses and get up to speed with some new secular trends it would be CSCO, and John Chambers is NOT the guy to do it.  Almost any outsider will do in my opinion.  This sort of announcement would have the stock up 10% in a week, and likely 25% in 6 months (in a market similar to the one we are in now).

Long dated options aren’t very expensive in dollar terms even as they are at the mid range of historical vol. For instance, the July 30 calls are offered at about .66, while the Jan16 30 calls are offered at about 1.15. That’s a lot of time for a breakout to occur, and these won’t decay much in the next few months (there is a .19 quarterly dividend).  But the issue for me at the moment is entry, $25/$26 area seems like a far better entry than 60c from the 52 week highs.  You’ll hear me say this a lot that I don’t want to chase stocks and this is a great example of where I’d rather let it come my way a little bit and then follow up with the trade. Long dated upside calls make sense for this but I’d love to get a better entry and perhaps a lower strike than those Jan 30’s.

We’ll keep an eye on this one.